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Each time the euro falls like it has done over the last several days suspicions arise that ‘this is it’ and it’s on the way towards 0, with a wholesale exit by individuals and institutional investors afraid of everything from inflation to a total breakup of the currency union.
The cross currents are enormous, and the range of predicted outcomes wide.
What’s sure as always is in the end someone will have had the right forecast, but it will be because of ‘statistics’- the forecasts cover all possibilities- or maybe inside information, but not greater wisdom.
Partial list of cross currents:
- The eurozone has relatively tight fiscal policy, with no proactive fiscal package of consequence. This keeps the euro strong, and promotes deflationary domestic conditions as the economy tries to export to gain needed financial assets.
- Fed swap lines tend to support the euro vs the dollar, as institutions that otherwise would need to sell euros and buy dollars to cover dollar losses can instead buy time and borrow them cheaply via the swap line arrangement. This kept the region from collapse in the fall.
- The dollar losses don’t go away with the swap lines, unless dollar asset prices and credit quality improve, which has not been the case. So any euro strength tends to see sellers of euro vs dollars to cover some of the losses.
- In a breakup of the eurozone there is a risk euro securities get redenominated to the new national currencies which may be subject to high levels of deficit spending to support domestic demand and promote high inflation, high interest rates, and falling currencies as in the past.
- Euro governments could default and payments be suspended indefinitely.
- Bank deposits could be frozen indefinitely with major bank failures too large for any national govt. to politically or even operationally write the check.
- The low price of crude supports the dollar by keeping dollars ‘hard to get’ for the foreign sector.
The exit from the euro includes those who buy gold, which has been driving gold to extremes vs other commodities even though you can’t eat it and it doesn’t pay interest, and it’s been a very long time since it was what you needed to pay taxes.
This is a major bubble in progress that ends in a very sharp collapse when the buying has run its course, and as those owning gold need it for payment purposes and begin to sell.
Along with the real buyers who are exiting the euro (and other currencies) are the usual specs and trend followers who exacerbate every trend on the way up and the way down.
And the fact remains that all the ‘money’ in the world is nothing more than spread sheet entries of what is needed to pay taxes.
And there aren’t a lot of practical alternatives to storing ‘wealth’ apart from inherently worthless gold, and various forms of ‘property’ that can all be taxed and therefore demands currency for payment.
Ironically, it is a spreadsheet crisis- there is no shortage of real resources- and therefore readily ‘fixed’ by the right data entry by governments on their own spreadsheets.
For the US that means something like:
- A full payroll tax holiday where the treasury makes all payments for employers and employees- why are we taking $1 trillion per year from workers and business struggling to make their payments?
- $300 billion to the states on a per capita basis with no strings attached- the per capita distribution concept removes the need for specific federal oversight.
Those two spreadsheet entries would end the ‘crisis’ in very short order.
And a government funded $8/hour job for anyone willing and able to work begins to replace the current unemployed labor buffer stock with an employed labor buffer stock, which is both a superior price anchor and potentially a source of increased useful output and reduction of the high real social costs of our current system.
But deficit myths are likely to remain the obstacle to making the spread sheet entries readily available to restore output and employment.
The latest ridiculous bit of non sense is that government borrowing takes ‘money’ from one place and puts it in another.
Government deficit spending adds exactly that many NEW ‘bank balances’ to non government financial assets, and government borrowing subsequently offers those NEW, ADDITIONAL bank balances CREATED BY DEFICIT SPENDING alternative financial assets called Treasury securities.
At the end of the day there are NEW financial assets called Treasury securities added to the existing stock of financial assets in the non govt sectors by federal deficit spending.
Spread the word!